To Bonus Or Not To Bonus?

Improving the way that we treat our people has a more sustainable impact on their productivity than their year-end bonus. But is there still room for traditional bonus schemes? And is there a type of bonus that works better than the rest?

Yağız Erkan
Feb 20, 2018 · 7 min read

Chances are you have worked in a company supporting a bonus-based incentive scheme. And chances are you have had your good and bad bonus stories. But have you ever thought if a bonus scheme is a good way (let alone the best way) to motivate and engage your people?

Let’s first get this out of the way for the TL;DR readers. Science tells us that people are better motivated by intrinsic factors, which is bad news for our current corporate bonus schemes. Let’s dive into this a little more.

Two great books that I would recommend on what motivates us and on extrinsic vs. intrinsic motivators are Daniel Pink’s Drive: The Surprising Truth About What Motivates Us and Alfie Kohn’s Punished By Rewards: The Trouble With Gold Stars, Incentive Plans, A’s, Praises, and Other Bribes. Both books cover how dysfunctional the carrot & stick approach is to getting things done.

What can we do, as leaders, if monetary rewards are not the best answer to creating motivation and engagement?

We can create an environment and a culture that help our people develop a genuine interest in what they are doing. “How much am I going to get for what I am doing now?” is not a productive and sustainable mindset. It pushes people to focus on their outputs and on single-faceted metrics. Instead, our job is to create the opportunities where our people get to learn new skills, to experience some variation in what they’re doing, and to acquire and demonstrate competence. Our job is to ensure that our people have autonomy, mastery and purpose. Once extrinsic rewards become goals, they crush the possibility of obtaining intrinsic rewards stemming from the work in question.

Without a doubt, putting in place an incentive-based system is easier than trying to crack the nut of satisfaction, motivation and engagement (a future blog post of mine is going to cover this trio). Bringing up and keeping this trio at a good level require hard work and personal attention. But that’s the best way to achieve the sustainable productivity that every company desire.

Happy people are more productive. Keeping your people happy contributes directly to how well they perform. Building trust and camaraderie strengthens altruistic behaviors and helps achieve team goals. Giving people autonomy and mastery of their craft increases their engagement and their feeling of responsibility to achieve their best.

In short, improving the way that we treat our people has a more sustainable impact on their productivity than changing the way that they are paid.

Non-Structured Bonuses

Before we discuss bonus schemes I’d like to mention two good ways to use bonuses:

Spot Bonuses

An area where the proverbial “carrot” can work well is spot bonuses. Unlike structured bonus plans, these unexpected, one-time bonuses reward exemplary behaviors right after the noteworthy actions. To achieve a greater impact on employee motivation their timing is very important. The recognition should arrive when the memory is still fresh in the involved parties’ minds.

Another characteristic of spot bonuses is their significantly lower amount compared to year-end bonuses. The main focus of a spot bonus is immediate recognition more than its monetary value. This could be a $200 payment or a gift voucher. When possible, a personal touch such as a voucher in their favorite restaurant could also become a great surprise.

However, consistency is key here, as rewarding people fairly and their perception of fairness can make or break their morale.

Rippas, Hugs, Kudos or Hero Awards

Rippas, Hugs, Kudos or Hero Awards (I’m sure they have many other names) allow peers to recognize each others’ exemplary behaviors and achievements. They break the top-down direction of a traditional bonus, and create peer-level or even bottom-up opportunities for prompt recognitions, which in turn encourage team work, strengthen personal bonds and raise individual satisfaction.

For a physical implementation, which I prefer over software solutions, you need a simple box (or a public wall) in the office and some cards that are going to contain written kudos. When someone needs to give special thanks to a colleague or to publicly recognize a co-worker’s special behavior or achievement, a new card is created with a short message. These messages can be anonymous, but I would recommend their authors to be named.

The awards associated with the kudos are simple gifts such as gift vouchers or cinema tickets. Similar to spot bonuses, these peer-level gestures put the emphasis on prompt recognition of exemplary behavior and achievements more than the monetary value of the gift.

You Need To Implement A Bonus Scheme?

I don’t believe that a bonus scheme is the best and most sustainable way to create higher engagement and to drive productivity. However, if you need to put one in place you have to think carefully and prepare well because missteps can be costly.

The first questions you have to ask yourself should revolve around the goal of the bonus scheme: “What are we after?” “What are we trying to improve or achieve?”

Once you have a mental path leading to your ultimate objective, you should define what the success criteria would look like. The most important aspect of this phase of the planning is coming up with measurable goals. Saying “you need to be a kick-ass engineer this year!“ would be setting people up for failure or leaving people to the mercy of their leaders’ assumptions and bias.

Those goals need not only to be measurable, but they need to be S.M.A.R.T:

  • Specific
  • Measurable
  • Achievable
  • Results-focused
  • Time-bound

Coming up with SMART goals is going to be easier said than done, but these characteristics constitute a great template for leaders to devise meaningful and fair goals. At this point a typical mistake would be to target “outputs”. Avoid that temptation, and focus on “outcomes”.

For example, setting a target on velocity for Scrum teams or number of lines of code written for engineers would cause these individuals to concentrate on the wrong aspects of their responsibilities. Even a quality metric such as low defect rate can be gamed by producing less. We may want to take a hit on our production dreams to obtain higher quality, but we certainly don’t want to chase the idea of perfect software that has no defects at the cost of going too slow and being late to market. Unfortunately when you give your people incentives to focus on the wrong metrics you can end up with these unwanted side effects.

One of the reasons why you would want your goals to be SMART is to create an evaluation system that is as objective and fair as possible. As I mentioned above, the perception of fairness is very important for your bonus scheme’s potential success.

A word of warning: in your attempt to cover a wide range of criteria, you will certainly leave certain aspects unmeasured. Those ignored aspects can, and probably will gradually lose importance, and this imbalance will probably create problems.

Partial Success

In most cases you’re going to want your people to obtain a part of their bonus even when they don’t reach their objectives fully. Ensure that their goals allow partial success.

Review the Results Regularly

Traditional corporate bonus schemes run annually, which is in most cases too long to remember and judge fairly. But the biggest problem with a “see you next year” or “don’t forget to bring your score card next year” approach is that we lose the opportunity to inspect and adapt during a long performance evaluation period.

Good agile teams do this very regularly. They analyze their past performance, and they take measures not to repeat the same mistakes and to repeat or improve the actions that delivered good results. By not evaluating someone’s approach for an entire year we would miss on the important opportunities to correct course and to make the necessary impact. After all, we put in place a bonus scheme to help our people improve in the first place. We need to do this more often than once a year.

Multi-Level Success Criteria

Individual goals may cause unwanted selfish behavior in a team setting. We don’t want individual competition in a team; we want collaboration. Therefore it is important to set goals that spread to different levels in the organization. In a small company, a three-tiered approach would include company objectives, team objectives and individual objectives. If necessary, in order to keep the goals impactful and relevant, we can adjust the levels accordingly. For example, we can replace the company objectives with departmental objectives.

Team-Only Bonuses

Another good approach is to pay bonuses to a team instead of individual contributors. This would get rid of certain possible selfish behaviors aiming to maximizing individual bonuses. The potential downside of this approach is to end up with some team member not pulling their weights but still getting rewarded for the entire team’s work. Coupling this approach with team building could result in good results.

Employee Turnover

In order to strengthen your company culture, consider giving prorated or partial bonuses to your people who left your company before the end of the bonus period. Unless you have special reasons not to (e.g. non-professional rupture of a contract, underperforming employee, etc.) recognizing your past employees’ last contributions always says great things about your culture and how much you value your people.

Bonuses Gone Bad

There are many ways that a bonus scheme can deteriorate company culture and employee engagement, but one certain way to reduce morale is to create a bonus scheme that is perceived unfair or unrealistic or unmeasurable.

You also need to be extra careful if your company have distributed bonuses without setting up measurable objectives up until now. Getting more money without a reasonable explanation might be good, but getting suddenly less than before without an objective explanation would engender a sentiment of unfairness and loss of trust in leadership very quickly.


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Yağız Erkan

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Technical leader in software development. Servant of Engineering, Product and IT teams. Avid reader. Passionate communicator of ideas and experiences.